Hi.

I have read in various places that contributions (but not earnings) may be withdrawn from a ROTH IRA at any time with no penalty. But it seems from what I have seen that there is a 10% penalty, if not held for 5 years and not 59 1/2.

I am in my thirities and am self-financing and building a home (not the first home I have owned). I am going to need extra funds because my well dried up, as did an additional one I drilled (meaning I need to drill a third).

Can someone point help me out, and point to the relevant IRS publications? I would like to pull out about $20K, some of it contributed more than 5 years ago, some less than that. If I do this do I need to make a statement on my income tax return and pay 10%?

Your help is appreciated.

Sincerely,

earthscaper

The place to look for is IRS Pub 590, p-65+. Link: http://www.irs.gov/pub/irs-pdf/p590.pdf[size="3"][/size]

The 10% during he 5 year rule is for distributions of amounts that were converted to a Roth IRA (and were exempted from the 10% penalty because the taxes were due to the Roth conversion). So, if you converted a Traditional to a Roth and were exempted from the 10% early withdrawal penalty, then if you withdraw any of the converted amount within 5 years, the 10% penalty will apply (unless you reach 59 1/2 or some other exemption applies).

You can always withdraw amounts that you actually contribute without penalty. The rule you are referring to are for amounts actually converted.

Hope this helps.

Hi,

Thanks for the response.

I have never had a traditional IRA - only ROTH IRA. When you say "You can always withdraw amounts that you actually contribute without penalty," that means my contributions (not earnings) can be withdrawn any time, for any reason? (I normally wouldn't do it, but I need the $$ for a well).

This seems like an outstanding provision, and one that would highly recommend contributing to a ROTH IRA as much as possible - if you can upon emergency withdraw contributions, it is like a secret savings account you don't intend to draw from until retirement but could if need be. Everyone should use them (provided a traditional IRA doesn't make more sense tax-wise.)

Thanks again,

earthscaper

"The 10% during he 5 year rule is for distributions of amounts that were converted to a Roth IRA (and were exempted from the 10% penalty because the taxes were due to the Roth conversion). So, if you converted a Traditional to a Roth and were exempted from the 10% early withdrawal penalty, then if you withdraw any of the converted amount within 5 years, the 10% penalty will apply (unless you reach 59 1/2 or some other exemption applies).

You can always withdraw amounts that you actually contribute without penalty. The rule you are referring to are for amounts actually converted.

Hope this helps."

They are very flexible in that regard, especially when you have contributed a large amount over several years. Penalty and Tax Free distributions of the amounts you contributed; and they come out first, leaving the earnings behind.

To expand on that just a bit... see page 67 of the IRS Pub linked above, "Ordering Rules for Distributions".... regular contributions come out first. So if you have made sufficient contributions to cover the entire amount of your withdrawal, then you have zero taxable distribution. So if you made $25K contributions, then it fully covers the $20K you want to withdraw. But if you only made $18K contributions, then it leaves $2K to come from earnings and would be taxable (and subject to penalty). The 10% penalty for early withdrawal (before age 59.5) is only on the taxable part of the distribution, so in this example it would be 10% of $2000, or $200 penalty. (See "Other Early Distributions" on page 66 of the IRS Pub)